Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re speaking with Lenny McLoughlin, chief investment strategist with Irish Life Investment Managers about themes that are likely to play a greater role in global markets in coming months. We talked about alternatives he likes, the shift from growth to value, and the value of diversification. And we started by asking about the continuing interest in ESG.

Lenny McLoughlin (LM): One of the themes that we believe will continue to be favoured by investors is ESG. Now, ESG did struggle in 2022, really driven by the out-performance of energy stocks that we saw, with the higher oil prices and gas prices globally. But when we look back over time, ESG has shown itself to be a steady, consistent outperformer. And we believe that will be the case going forward. Everybody’s aware — corporates, investors, politicians — of the risks to humanity and investment markets if the climate issue isn’t addressed. In terms of flow into the ESG product area, last year it was much, much better than the flows that we saw into market-cap equities, and we think that will continue going forward. There has obviously been an under-investment in renewables in recent years. We believe you’re going to see increased investments in renewables going forward. This is reaffirmed by the commitments in Europe to invest 300 billion [euros] in renewables in coming years, and we think this is going to improve the returns. And we think the overall ESG agenda remains quite important as investors continue to push towards cleaner tech, and, again, are just more conscious and aware of the climate impacts if this issue isn’t fully addressed by investors.

Value over growth

LM: Value over the very, very long term has traditionally outperformed growth stocks. The last 10 or 15 years has probably been the exception to the norm, where growth has significantly outperformed. And the environment that we’ve been in has been hugely beneficial to growth stocks, in that we’ve been in a low nominal growth environment and a loose monetary policy environment. I suppose some of the value areas of the market have struggled with individual issues, particularly if you look at the banking and financial sector, the concerns post the financial crisis — increased regulation, increased capital requirements — were drags on those areas of the market. They should no longer be drags of the same extent that they have been over the last 10 or 15 years. And again, a higher-yield environment would be beneficial for financial stocks. So, overall, we do continue to favour value versus growth over the medium to long term, given the valuation discount it is trading at, but also a more satisfactory, more supportive environment for value stocks with a higher-yield environment, and with a better nominal growth backdrop likely compared to last 10 or 15 years.

Thematic funds

LM: One other area we think could do well in coming years is based around thematic funds, or long-term megatrends which provide superior long-term returns in various parts of the markets. Three in particular we think provide opportunities. One is environmental — investments related to the shift to the low-carbon economy. Second is technology disruptors — innovation that is driving progress in both tech sectors and non-tech sectors. And, finally, on health and society — investment in growing populations, demographics, increasing longevity, and long-term opportunities in areas such as healthcare, transport, and food services. We do think these thematic areas will provide long-term opportunities for investors as well.

About reducing risk

LM: Risk management is a key element of ensuring that investors stay invested, and are able to participate in the upside when it does eventually come. And it kind of dampens the volatility around performance when markets are falling, it provides investors with a smoother journey, and it provides protection in times of uncertainty. But it also allows them to participate in the recovery in markets when you do get that coming through.

And, finally, what the savvy investor should keep in mind.

LM: Again, I think looking back to 2022, it shows the benefits of having a diversified portfolio, in that when certain assets like equities and bonds underperform, if you didn’t hold other assets such as alternatives or cash or commodities, you would be vulnerable to significant losses. And when we look at some of the areas that you could hold within a diversified portfolio, I think alternatives are a good option. Infrastructure showed strong positive returns with good visibility over the medium to long term. And they have inflation-linked features, so they do provide good offsets within a diversified portfolio.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Lenny McLoughlin of Irish Life Investment Managers. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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